Drowning In Oil? IEA Revises Demand Lower, Supply Higher


Developing countries’ growth is at its lowest rate in more than a decade. A strong U.S. dollar vexes importers and pressures oil demand. And China, the long-time driver of global demand isn’t living up to expectations.

All of which leaves the world awash in an oversupply of cheap oil whose prices apparently have nowhere to go but down, according to the International Energy Agency’s January oil market report.

The agency revised oil demand expectations down for the fourth quarter 2015 by 300,000 barrels per day (bpd) and another 100,000 bpd for the first quarter 2016. Supply from countries not operating within the Organization of Petroleum Exporting Countries (OPEC) is now projected to decline by 400,000 bpd at the end of 2015, and by 300,000 bpd at the beginning of 2016.

“In the first two weeks of the year, both [West Texas Intermediate] and Brent settled below $30 [per] barrel and a procession of investment banks has warned that oil prices could ‘fall’ to $25 per barrel, $20 per barrel or, in one case, $10 per barrel,” the report said.

The oil market is starting at the prospect of a third consecutive year in which supply exceeds demand by a million barrels per day, and the strain on the market will be enormous. While it’s estimated that non-OPEC oil production is expected to drop by 600,000 per day, the IEA said it will be a wash because newly un-sanctioned Iranian oil will replace it. And Middle Eastern producers have a stated policy to protect their market share and let the price find itself.

But commodities markets are nothing if not a volatile art or inexact science. As analysts at Simmons & Company International note in a Tuesday report, oil was $13 per barrel in March 1999, but they had more than doubled to $30 per barrel by the following January.

What’s more, analysts at Tudor Pickering Holt & Co. (TPH) noted in a daily note the IEA’s assertion that global inventories stood around a whopping 1 billion barrels between 2014 and 2015.

“There is no mistaking the fact that global oil markets are oversupplied,” TPH said. “But a billion barrels?”

Such a figure would mean that OPEC had built 650 million barrels – twice the pace of non-OPEC inventories, “which defies logic and certainly defies economic and logistical reality,” they said in the report.

“Has the IEA thrown in the towel?,” TPH asked, noting IEA’s focus that BP is slashing jobs, Petrobras is cutting investments, and Saudi Arabia is reducing domestic fuel subsidies – signs of the oft-repeated “lower for longer” period of low oil prices.

“We will take the other side of that argument. No. 1, industry participants are reacting to the reality of current oil prices and are not making a call on the out years, and No. 2, this behavior is exactly why the market will rebalance itself as the upstream will continue to be capital starved [equaling] ongoing [and] accelerating declines.”









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